What Consumers Need to Know About Point-of-Sale Loans

It's normal for retailers to pitch credit cards to shoppers during checkout. The pitch usually comes with an incentive - like a discount on the initial purchase. More retailers are offering a new payment option for consumers: point-of-sale loans. Customers are offered the loans both in-store and online at checkout.

Point-of-sale loans are often offered for big ticket items. With the ease of lending, the loans are also offered for online purchases regardless of price. The loan offers an easier way to make small monthly payments on more purchasing like furniture and electronics. Retailers may entice you with the smaller monthly payment, but that’s not the only thing to consider before signing up.

The fine print is important. Point-of-sale loans don’t just break up your purchase into payments. The loan adds in interest for the convenience of paying over time. Ask about the interest rate so you can better understand the annual cost of borrowing. Interest rates can be quite expensive - as high as 30% - which is why it’s important to ask upfront. Don’t take on a high interest rate, even if you can afford the monthly payments. You may be able to save money on interest by shopping around, using a credit card, or by paying in cash upfront.

Pay attention to the terms of any special financing promotion. You may have to pay off the entire balance during the promotional period to avoid being hit with interest dating back to the date of purchase. It’s not always it’s not always obvious in the marketing, which is why it’s so important to read the fine print.

Your budget must be able to handle the payment. You may feel pressured to accept the loan offer on the spot, but you should avoid making impulsive borrowing decisions. Check your monthly budget to confirm you can cover the monthly payment after all your other expenses are paid. Don’t overextend yourself. If the extra monthly payment will push you more toward paycheck-to-paycheck territory, don’t take on a new loan. And if you were already prepared to pay with cash, there's no reason to take on a new debt obligation.

There may be a credit check. Depending on your credit history, you may only qualify for a higher interest rate or you may not qualify for the loan at all. If you’re planning to apply for a mortgage or car loan soon, a new credit inquiry and a new loan can make it harder to qualify. Some lenders may do a soft credit check, which won’t hurt your credit score. Ask before you apply if you’re concerned about the potential impact to your credit.

If you’re approved, the loan history will likely show up on your credit report and affect your credit score.

You have a fixed monthly payment and repayment period. While credit cards offer the flexibility to make payments for as long as it takes, point-of-sale loans are repaid in a specific amount of time. The fixed monthly payment makes it easier to budget for your monthly payment, but doesn’t offer any flexibility if your finances change.

You may have to apply again in the future. A point-of-sale loan is a closed-ended loan. Unlike a store credit card, you can’t use the loan again once you’ve paid off the balance. After repayment, the loan is closed. If you have future borrowing needs, you’ll have to go through the application process again.

You won’t earn any rewards points. Since the point-of-sale loan isn’t a credit card, there’s no incentive for using it beyond the ability to break up a large purchase into smaller payments. Traditional credit cards, when used correctly, allow you to earn rewards that you can apply to future purchases. You don’t get extra perks for using a point-of-sale loan.